Some Variety in Hospital Pricing Makes Sense

Diane Carol Bast is an editor with The Heartland Institute and its finance manager. She oversees the production of books, policy studies, newsletters, and other publications produced by The Heartland.

Bast has edited or written more than 140 studies and 13 books on state and local public policy, including The Patriot's Toolbox (fourth edition coming Fall 2017), Why Scientists Disagree About Global Warming (second edition January 2017), and Power to the People (2015).

I’m no economist. But I was annoyed by a recent article in the Chicago Tribune reporting a new federal survey of hospital prices. I wanted Tribune readers to think a little more critically about that issue: why assume a hospital procedure should cost the same regardless of what hospital it’s performed at? Here’s what I wrote:

Is it a big deal if hospitals charge different prices for “the same procedure”?

Should it really concern us that different hospitals charge different fees for “the same procedure”? (“An acute gap in prices at hospitals,” May 9)

For starters, let’s acknowledge that the product/service may differ among hospitals. Would we be surprised that “a hamburger” costs less at McDonald’s than at Fuddruckers? Of course not. The products, indeed the entire eating experience, are different at the two franchises. It’s quite likely the experience of being treated for a case of “simple pneumonia” is different at Stroger Hospital than it is at Loyola Gottlieb Memorial.

Then there’s the question of demand: Given the choice, would you rather have your pneumonia treated at Stroger or Loyola? Even if the two hospitals started charging the same fee, it wouldn’t take long for the laws of supply and demand to increase the fee at Loyola.

Finally, there is the matter of who pays. To the extent any hospital may be overcharging for its services, it’s likely because patients don’t “shop around” for those services … because they don’t directly pay for them. Insurance companies or government (through Medicaid and Medicare) pay – and they pay whether we have our pneumonia treated at Stroger or at Loyola. Medicaid, Medicare, and insurance companies sometimes question a charge and refuse to pay all of it. That’s about the only price-pressure hospitals feel.

So how does President Obama’s health care overhaul fix this third-party payer problem? It doesn’t. In fact, by encouraging even more people to get Cadillac insurance coverage and discouraging the use of consumer-directed health plans that actually give consumers incentives to comparison-shop, the president’s plan will make this situation worse.